Einde inhoudsopgave
Treaty Application for Companies in a Group (FM nr. 178) 2022/4.3.2.3
4.3.2.3 PSD benefits & the OECD MTC
L.C. van Hulten, datum 06-07-2022
- Datum
06-07-2022
- Auteur
L.C. van Hulten
- JCDI
JCDI:ADS659408:1
- Vakgebied(en)
Omzetbelasting / Plaats van levering en dienst
Voetnoten
Voetnoten
S. Bell, ‘Cross-border repatriation of dividends: tax neutral in the European Union?’, Finance and Capital Markets 2005, vol. 7, no. 1, par. 9.
In the OECD Commentary it is explained that, due to great differences between the laws of the OECD member countries, it is impossible to find a full and exhaustive definition of dividends. Therefore, the given definition merely mentions examples that are included in the majority of the member countries’ laws (Commentary on art. 10 OECD MTC, par. 23).
Commentary on art. 10 OECD MTC, par. 24.
After taking into account costs associated with the acquisition of shares.
E. Reimer et al., Klaus Vogel on Double Taxation Conventions, Alphen aan den Rijn: Kluwer Law International 2022, p. 937.
This would also mean the different treatment of capital gains (no source taxation) and dividends (5% or 15% source taxation) would no longer provide tax avoidance possibilities (R.J. Vann, ‘Taxing International Business Income: Hard-Boiled Wonderland and the End of the World’, World Tax Journal 2010, vol. 2, no. 3, par. 2.4.3). However, the economic double taxation would continue to exist (see in this regard suggestions in the remainder of this section).
Council Directive 2003/123/EG of 22 December 2003 amending Directive 90/435/EEC on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States. Step 1: 20% from 1 January 2005 to 31 December 2006, step 2: 15% from 1 January 2007 to 31 December 2008; and step 3: 10% from 1 January 2009.
Council Directive 2003/123/EG of 22 December 2003 amending Directive 90/435/EEC on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States, preamble, par. 7.
Commission staff working paper, ‘Company taxation in the internal market’, SEC(2001)1681 which resulted in the Communication from the Commission to the Council, the European Parliament and the Economic and Social Committee, ‘Towards an Internal Market without tax obstacles. A strategy for providing companies with a consolidated corporate tax base for their EU-wide activities’, COM(2001)582.
Communication from the Commission to the Council, the European Parliament and the Economic and Social Committee, ‘Towards an Internal Market without tax obstacles. A strategy for providing companies with a consolidated corporate tax base for their EU-wide activities’, COM(2001)582, p. 42.
See also par. 2.4.3.2.
Art. 7, par. 1, OECD MTC.
Art. 7 and art. 23 A or 23 B OECD MTC.
Art. 10, par. 2, OECD MTC.
Please note that, if the parent and the subsidiary would be in the same state (i.e., parent company in state A, permanent establishment in state B and subsidiary in state A) the Commentary on art. 23 A and 23 B OECD MTC, par. 9.1 provides for a potential solution (see also par. 3.3.3.11).
As permanent establishments are not ‘persons’ for tax treaty purposes. Art. 24, par. 3, OECD MTC could require the permanent establishment state to grant treaty benefits to the permanent establishment in certain cases. Additionally, in line with CJEU, 21 September 1999, Case C-307/97, Compagnie de Saint-Gobain, Zweigniederlassung Deutschland v Finanzamt Aachen-Innenstadt, ECLI:EU:C:1999:438 EU Member States are – under circumstances – required to treat a permanent establishment the same as a subsidiary company. This essentially entails that a permanent establishment that is situated in an EU Member State has the possibility to claim the same double taxation relief as a subsidiary could claim if the subsidiary had been the recipient of the income.
For more information see E. Fett, Triangular Cases: The Application of Bilateral Income Tax Treaties in Multilateral Situations, Amsterdam: IBFD 2014.
Commentary on art. 24 OECD MTC, par. 53.
The question arises whether this could be solved via a multilateral tax treaty. For example, in the Nordic Convention on Income and Capital 1996 a solution for certain triangular cases is provided (M. Helminen, ‘Scope and interpretation of the Nordic multilateral double taxation convention’, Bulletin for International Taxation 2007, vol. 61, no. 1, par. 2.4). More on this will follow in chapter 6.
Depending on the domestic legislation of the relevant states.
Commentary on art. 23 A and 23 B OECD MTC, par. 51.
Commentary on art. 23 A and 23 B OECD MTC, par. 50.
Alternatively, it could, inter alia, be considered to provide for relief of double taxation at a domestic level. See, e.g., R. Couzin, ‘Relief of Double Taxation’, par. 4, appendix to B. Arnold, J. Sasseville & E. Zolt, ‘Summary of the Proceedings of an Invitational Seminar on Tax Treaties in the 21st Century’, Bulletin for International Taxation 2002, vol. 56, no. 6.
Commentary on art. 23 A and 23 B OECD MTC, par. 12-17.
Commentary on art. 23 A and 23 B OECD MTC, par. 52.
The functioning of option c mainly depends on the national legislation.
That also seems in line with case law of the CJEU. The credit method and exemption method are considered to be equivalent methods for the avoidance of double taxation (CJEU, 10 February 2011, Case C-436/08 and C-437/08, Haribo Lakritzen Hans Riegel BetriebsgmbH, Österreichische Salinen AG v Finanzamt Linz, ECLI:EU:C:2011:61, point 90).
To what extent does the OECD MTC already include PSD-like benefits? The first question to be answered in this respect is whether there is a difference in the definition of profit distributions in the PSD and dividends in the OECD MTC. The PSD does not define the terms distributed profits and distributions of profits. From the preamble it follows that the objective of the PSD is to exempt dividends and other profit distributions paid by subsidiary companies and to eliminate double taxation of such income at the level of the parent company. In the absence of a definition, and considering the objectives of the Directive, it can be argued that a broad definition should be used.1 The OECD MTC defines dividends as income from shares, jouissance shares or jouissance rights, mining shares, founders’ shares or other rights, not being debt-claims, participating in profits, as well as income from other corporate rights which is subjected to the same taxation treatment as income from shares by the laws of the State of which the company making the distribution is a resident.2 It basically concerns distributions of profits by companies.3 Therefore, there seems no relevant difference in the two terms for this research.4
Under certain circumstances, the OECD MTC provides for a reduction in the withholding tax on dividend payments. In short, there is a reduced withholding tax rate of 5% if the recipient holds at least 25% of the capital of the company paying the dividends. A clear difference between the dividend provision in the OECD MTC and the PSD is that the former provides for a reduced withholding tax rate, while the second provides for an exemption from withholding tax. Art. 10 OECD MTC does not resolve juridical double taxation in group situations by the allocation rule in itself. The state of residence of the shareholder is allowed to tax dividends arising in the other state. However, it must credit against own taxes levied on the dividend the tax that has been withheld by the state where the dividends arise. Thus, for withholding tax purposes, an OECD MTC-compliant tax treaty will provide for the prevention of juridical double taxation at the level of the recipient by applying art. 23 A or 23 B OECD MTC. However, usually the juridical double taxation is not fully eliminated, as withholding tax is levied as a percentage of the gross amount, whereas for determining the credit for taxes paid abroad the net amount5 is taken into account.6 Additionally, if the participation exemption is applied to the dividends, the foreign tax credit might not be available. To fully eliminate juridical double taxation in group situations with respect to dividend payments on a treaty level – using the current framework – it seems most logical to amend the distributive rule to allocate taxing jurisdiction on profit distributions on an exclusive basis to the residence state.7
Another difference between the PSD and the dividend article in the OECD MTC is the fact that the latter requires a higher holding percentage to qualify for the benefit.8 In 2005, the PSD required that the parent company had to keep at least 25% of the shares in a subsidiary in order to be eligible for the benefits of the Directive. This minimum percentage has been gradually reduced.9 The reduction has been implemented to allow the Directive benefits to apply in more situations.10 The reason for this was the conclusion of a study on the levying of corporate income tax.11 It found that a fundamental concern among companies in the internal market is to remove tax barriers to income flows between affiliates.12 The PSD provides for a broad definition of ‘the group’ since – in brief – only a minimum holding of 10% in the capital of a company of another Member State is required.13 This broad group approach positively contributes to the prevention of double taxation. For the application of tax treaties this can likewise be an argument to lower the required shareholding percentage.
As described, the PSD provides for specific rules regarding the treatment of permanent establishments of qualifying companies. Under the OECD MTC the source state may tax the business profits that are attributable to a permanent establishment of a non-resident company.14 The residence state has the right to tax the worldwide income, but should provide relief from double taxation.15 If an entity carries on its business via a permanent establishment, an unlimited right to tax the profits is given to the state of source. This is different if the entity conducts its business via a local entity (see figure 4.4 and 4.5): in that situation the state of source has the unlimited right to tax the profits of the local company and, in addition, the possibility to levy a (limited) withholding tax on profit distributions.16 From an economic perspective it cannot be explained why this economically similar situation should be treated in a different manner.
If a company in state A holds the shares in a company in state C via a permanent establishment in state B, this is a triangular situation (see figure 4.6). The potential double taxation and tax avoidance opportunities that can exist in such situations are not necessarily solved in the current treaty framework.17 The key problem is the fact that the source state is not required to apply the treaty between the source state and the permanent establishment state (the B-C treaty),18 even though the treaty between the residence state and the permanent establishment state (the A-B treaty) will generally allocate the taxing rights to the permanent establishment state.19 Hence, there currently is no similar tax treatment of dividends distributed between companies (a parent company and a subsidiary) compared with the treatment of a permanent establishment that receives dividends on holdings forming part of its assets.20 The ‘PSD solution’ for this problem cannot be easily used in a tax treaty context, due to the bilateral nature of tax treaties.21 Truly solving this issue would require a more comprehensive solution, which will be the central topic of the following chapters.
The OECD MTC provisions do not prevent recurrent corporate taxation on the profits at the level of the subsidiary and the parent company. Therefore, after the application of art. 10 OECD MTC economic double taxation can22 continue to exist. The main reason why the OECD MTC does not provide a solution for such recurrent taxation seems to be the practical difficulties to come to a suitable design due to the differences in the national dividend taxation systems, and the fact that various solutions are possible.23 Therefore it is up to the Contracting States whether or not they provide a solution for the problem.
Would eliminating double taxation, which is provided for in the PSD, fit within the OECD MTC given its goals? As explained, the PSD aims to eliminate both juridical and economic double taxation with an aim to stimulate the international grouping together of companies. The OECD MTC aims to avoid juridical double taxation in order to reduce tax obstacles to cross-border services, trade and investment. In the OECD Commentary it is recognized that the recurrent taxation on the profits distributed to the parent company creates a very important obstacle to international investments.24 Even though the OECD MTC is not aimed at eliminating economic double taxation, due to the obstacles for international trade that are caused, it seems perfectly logical to provide for a solution. By eliminating the recurrent taxation on profit distributions, the group situation, and thus the economic situation of a multinational company, would be better reflected.
The elimination of economic double taxation with respect to dividend payments on a treaty level – using the current framework – can be achieved in two different manners.25 First, the distributive article on dividends could be amended. However, allocating taxing jurisdiction on an exclusive basis to either the source state or the residence state does not solve the problem, as the profits are already taxed in the source state. This would thus require a full deviation from the current format of the model, as for both states it would have to be prohibited to tax the dividends.
Second, if the double taxation is not solved in the distributive articles, a method for the elimination of double taxation could be incorporated in art. 23 A or 23 B of the OECD MTC. The leading methods for the elimination of double taxation are26:
the principle of exemption: the state of residence does not tax the income that may be taxed in the state of source. This method can be subdivided in two main methods:
full exemption: via the application of a full exemption the foreign-source income is eliminated from the tax base altogether. The foreign income is not taken into consideration in determining the amount of tax imposed on the rest of the income; and
exemption with progression: the foreign income is not taxed, but taken into consideration when determining the amount of tax imposed on the rest of the income.
the principle of credit: the state of residence calculates the tax due based on the worldwide income, and subsequently allows a deduction from its own tax for tax paid abroad. This method can be subdivided in two main methods:
full credit: the total amount of tax paid abroad can be deducted from the tax due in the residence country; and
ordinary credit: the deduction from the tax due in the residence country is restricted to the part of the own tax that is appropriate to the income which may be taxed in the other state.
When trying to solve the economic double taxation in a tax convention, the following three principles are most frequently followed in practice:27
an exemption with progression: under this principle, the state of the parent company exempts the dividends received, but takes these dividends into account for the calculation of the tax due on the remaining income. Such a solution is particularly preferred for countries that apply the exemption method.
granting a credit for underlying taxes: if a credit for underlying taxes is given, this should include both the dividend as such, and the tax paid by the subsidiary on the profits made. This solution direction is particularly preferred for countries that apply the credit method.
assimilation to a holding in a domestic subsidiary: as a third approach, a participation in a foreign subsidiary can be treated the same way as a participation in a domestic subsidiary, whereby received dividends would be treated in the same way in both situations. Whether this last solution provides for the prevention of economic double taxation naturally depends on the national legislation of the state of the parent company.
The fact that some states currently already eliminate economic double taxation in their bilateral conventions based on the above described principles, can raise the question whether it is necessary to look for a solution at OECD level. In my view this is the case, as it would then be the ‘default’ mode, rather than an option. If double taxation were to be solved via art. 23 A or 23 B of the OECD MTC, it could be considered to include in a tax treaty both option a and b, as those options provide a solution at a treaty level.28 Providing two solutions gives Contracting States the possibility to apply a method that suits them best, similar to the approach taken in the PSD.29 In practice, it will depend on the tax policy of the country which method is the preferable method. The exemption with progression has as an advantage that it provides a level playing field in the foreign market. Though, if a credit is granted for underlying taxes, this ensures that there will be no double non-taxation. However, as corporate income tax has in principle already been levied on the amount that is distributed as dividend, true double non-taxation will not likely occur in this respect. It can be argued that extending the scope of the OECD MTC to include PSD-like benefits in a group situation is merely another manner to counteract the harmful consequences of the separate entity approach. Under a group approach, in which a group of companies is considered to be the taxpayer, dividend payments in an intra-group context would not exist, avoiding all potential double taxation issues in full. This will be elaborated in more detail below.